Startup hub Station Houston reincorporates as nonprofit

Startup hub Station Houston reincorporates as nonprofit

January 11th, 2019by Houston Chronicle in Texas News

This March 1, 2017 photo, shows workspace at the offices of Station Houston in Houston. Station Houston, one of the city's most prominent startup hubs, has reincorporated as a nonprofit, the latest reboot in Houston's continuing quest to find the right formula to create a vibrant technology and innovation scene. (Jon Shapley/Houston Chronicle via AP)

HOUSTON—Station Houston, one of the city's most prominent startup hubs, has reincorporated as a nonprofit, the latest reboot in Houston's continuing quest to find the right formula to create a vibrant technology and innovation scene.

The Houston Chronicle reports Station Houston, founded just over two years ago as a for-profit company, says becoming a nonprofit will allow it to attract more funding from grants and foundations to augment what it earns from charging fees to big corporations, such as energy companies, seeking introductions to new technologies. The change, executives said, will provide more money to invest in programs that spur local entrepreneurs and turn innovative ideas into successful businesses.

But technology analysts say that Station Houston risks losing the edge that makes innovation happen. In general, for-profit organizations thrive if they can cultivate startups that attract investment then get bought by bigger companies or become publicly traded. Nonprofits, however, could rely on fundraising to survive even if their startups don't succeed.

"An active startup ecosystem is not looking for grant dollars," said Marc Nathan, who publishes the Texas-Squared Startup Newsletter and previously worked with Houston entrepreneurs. "They're not begging. They're earning their money through making successful companies."

Houston, as it seeks to diversify its oil-dependent economy, has aspired in recent years to build a technology cluster. But like many cities outside established tech centers such as Silicon Valley, Boston and Austin, progress has not come easily. An earlier tech accelerator program focused on energy software shuttered in 2016, and about half the startups affiliated with it left the city.

The acceleration program of the Houston Technology Center was closed after the tech center was folded into a new organization called Houston Exponential in 2017 to centralize and coordinate efforts to promote Houston's technology sector, include raising an investment fund to help attract venture capital for local startups. Houston Exponential has raised half of its $50 million goal for the fund.

But the tech community keeps trying. Newer organizations are trying to make Houston a hotbed for esports or medical technologies. And Rice University last year announced an innovation district in the former Sears building in Midtown, in which Station Houston is a partner to provide programming for entrepreneurs.

Gaby Rowe, CEO of Station Houston, said that becoming a nonprofit will help the organization extend and broaden its reach, including a new initiative, called Station 3.0, that includes a stronger focus on industrial and business-to-business entrepreneurs to take advantage of Houston's strengths as a global corporate center and a new in-house business accelerator program concentrating on energy, industrial and transportation startups.

Its new accelerator program will focus on energy, industrial and transportation startups. The three-month program, with three weeks at Station Houston and nine weeks remote, will culminate with a pitch competition. It will not take equity in startups.

Rowe said the accelerator is, essentially, a condensed time frame of the coursework already offered by Station Houston. It's ideal for companies needing a shorter time frame or for those based outside of Houston that want access to the city's large industrial corporations.

Station Houston is also in talks with nationally recognized accelerators that could operate from within Station.

"We want everybody to be able to be part of the Station community," said Rowe, who has been CEO for five months, "so we can grow with the (innovation) ecosystem and help the ecosystem grow."

Other tech development programs, including the 1871 startup hub in Chicago and the MassChallenge accelerator based in Boston, have succeeded as nonprofits, said Rowe. They have managed to maintain the drive needed to get startups to the next levels of funding, product development and commercialization.

The transition to a nonprofit received unanimous support from Station Houston board members.

Rowe said that Station has created measures to keep the organization aligned with its profit-making roots and to calm any concerns that becoming a nonprofit would lead the organization to rely on fundraising rather than the success of its entrepreneurs. Investors voiced support for the nonprofit model.

"For Station Houston to continue to make an even larger impact on the innovation climate in this city," said investor Harvin Moore, principal at advisory and investment firm Frontera Technology Ventures, "a nonprofit format makes sense to get to that next level."

But Ed Egan, the former director for Rice University's McNair Center for Entrepreneurship and Innovation, disagreed. He had previously praised Station Houston for boosting venture capital investment in the city's startups. When Station Houston debuted in 2016, Houston ranked 39th among U.S. cities in venture capital activity.

The city climbed to 29th during the first half of 2018, in large part because of Station Houston, said Egan, now a professor at the McDonough School of Business at Georgetown University.

But he expects such advances will be lost. Startups in for-profit entrepreneurial accelerators, hubs and incubators tend to raise more venture capital money than startups in similar nonprofit organizations. Ten of the country's top 12 accelerator programs—defined by the number of startups they assist and the amount of money those startups raise—are for-profit, he added.

"By becoming a nonprofit, they are saying that they can't compete," Egan said. "We don't want people who can't compete running Houston's ecosystem."

Other academics who study innovation and entrepreneurship say that the right model for a tech development program often depends on the goals. For-profit accelerator programs, which typically take small ownership stakes in the startups they accept, are probably better at finding the most promising companies and helping them attract venture capital. Nonprofits tend to do better at promoting the broader innovation ecosystem, rather than specific companies, some academics said.

"There are trade-offs in each one," said Jorge Guzman, who teaches entrepreneurship strategy at Columbia Business School.

SJ Maxted, director of strategic initiatives for The Engine, which helps develop advanced technology startups in the Boston area, doesn't think for-profit or nonprofit status is the most critical element. Every entrepreneurial community needs both.

"Both models serve very important roles," she said. "You can't have an ecosystem that has all for-profit, and you can't have an ecosystem that's all nonprofit. So you have to have a mix."

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